How to get greater transparency with open banking

Managing

November 15, 2018

At WinTec IOT's meetup, last month, I had the opportunity to talk about finappster and open banking. I think it's exciting that technology has made so many aspects of our lives more easy to manage. Fundamentally it's changing the way we think.

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For example, when I was young, my parents always told me never to get into cars with strangers. Now I do it all the time.

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Uber revolutionised the taxi industry by making travel safer and more transparent; Spotify recommends music to us based on what we’ve listened to before; and Netflix has given us control over what we watch on TV and when. On Amazon we can get just about anything we want, when we want it and if you’re a seller on Amazon, they can offer you a line of credit based on your sales history. Rumour has it they may also offer bank accounts and credit cards in the near future.

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Technology has enabled us to do things more quickly, more conveniently and personalise our experiences to meet our individual expectations. It’s like having a connected friend, who knows our tastes, what we want and when, so they flick us a message saying “hey, heard of this? Let’s give it go.”

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But what about banking? How quickly can you get a loan from your bank? How many of you find it easy to manage your finances? On a daily basis? Weekly? Monthly? How is your bank helping you with this? Does your connected friend tap you on the shoulder to remind you that the deal for that 3D printer you bought means no eating this week?

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How many times have you had to call your bank to ask for a time to meet? The first time you would have driven to your bank; meet a bank person; shown them your ID; filled in forms and waited (possibly days) before you could actually start using your account.

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And then you would have had to repeat that process to get a loan? Except instead of showing them your ID, you had show them what you wanted to buy, your pay slips and your budget to prove that you could pay them back, and therefore worthy of getting a loan.

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If you’ve already got a relationship with them, they’ve already got your financial data. They know what you earn. And they know what you spend your money on. So why are you spending time doing this?

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I guess I have to be fair and say that banks have made some technological progress. With an established relationship you can now access your bank accounts via an app on your mobile phone. Some of you may even use two or even three banking apps if you split your mortgage, or perhaps you’re lucky enough to have more than one property? And you might have a different one for your KiwiSaver provider if that’s separate to your bank.

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And they’ve actually got the whole payment process down pat and they can complete thousands and thousands of transactions a second. The payment process is quite linear. So in buying my 3D printer off Amazon, I used my credit card. My card would have facilitated the payment from my bank to the store’s bank. And I can see the money going out almost immediately. Not always a good thing :(

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But I have a dream of retiring before I’m 50. And to do that I try and keep track of my money.

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It used to be that I tracked everything in a spreadsheet. My budget. My expenses against my income. What I was saving. How my investments were tracking. I got really good at excel - to a point where all I had to do was copy and paste all my financial data from a myriad of csv files into my excel spreadsheet and everything would update automatically. It was a thing of beauty :)

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But this took ages. And I would have to be in front of my desktop with this spreadsheet open. Having to remember my myriad of passwords to download the files. And copy and paste them across. But there was no instant snapshot of where I was at, whenever I needed it.

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But you know what?

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Managing finances shouldn’t be this time consuming and difficult. It should be fast. It should be easy. And whatever I do, I should be able to do it with the knowledge and confidence that I can trust the providers I’m using, to make sure my money and my financial data is safe. To help me get ahead financially.

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I mean, how hard is that?

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To be fair, banks have sussed payments.

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But to open an account in a matter of minutes. To alert me when my spending exceeds my daily budget. To get a loan quickly to cover an unexpected cost. And what about my future? Helping me to grow my wealth and manage it in a way that I can travel as much as I want to, buy my home and retire when I want to?

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What is open banking?

This is where open banking comes in. Open Banking gives us the right to safely and securely share the financial data, that banks have about us, with trusted third parties. It’s our financial data so we should be able to control who has access to it, right? So that we can find financial products that are relevant to us, based on our transaction history. That we can open an account or get a loan quickly, easily and safely. Manage our budget. Grow and manage our wealth sustainably.

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There are already a myriad of apps available now to help us manage our finances so let's have a look at some of the Kiwi-born apps now, and how open banking has or can help make our lives easier.

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You might have used Pocketwise, for example to compare providers, services, fees and anything else specific to the account you want. If you’ve done a google search to compare products you would have seen hundreds of companies that can help. But how relevant are all those responses to you? Open banking can help make these responses directly relevant to you. So you save time not having to sift through all the irrelevant results.

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Now, no matter where you are, when you’re ready you can use your mobile to apply to open an account All you have to do is take a photo of you, a photo of your ID, and if everything matches up you can be transacting from that account in a matter of minutes. So you save time not having to go into a branch.

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For a small loan you might have used Harmoney or Moola to apply, get and use the loan within a matter of minutes. No painful conversations, worrying about your credit score or pulling together of budgets and payslips. Open banking might also enable successful loan applications to those previously not able to get one.

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To help me keep track of my budgets I can use PocketSmith. PocketSmith gives me more control over my money. I can link my accounts, categorise my spending, get cashflow forecasts and answers to what-if scenarios like “can I afford to eat next week if I buy this 3D printer?” And in addition to that, imagine being “coached” into improving your financial decisions by getting “just-in-time” alerts as you spend and save. If I’d had that, I probably wouldn’t have bought that 3D printer.

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What about GenoaPay or AfterPay – a new way of buying now and paying later? You can also get personalised product offers based on your shopping habits. And wouldn’t it be great if, when I bought my 3D printer, I was prompted to automatically top up my contents insurance to cover it?

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Have you used your mobile phone to manage the tax on your crypto investment or buy shares, in a few taps yet?. Imagine getting a financial plan given to you, based on your transaction data. What about getting real-time recommendations on what investments to buy or sell based on your financial plan, personal values, preferences, budget and availability? Open banking can help with this too.

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What about keeping track of all this? I use finappster to track all my investments in one place and make sure that what I’m invested in isn’t supporting the development of cluster bombs and the slave trade. Open banking makes this possible, so I don’t have to keep a spreadsheet. Or look at six different apps each time.

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If this sounds familiar to you're probably already participating, or keen to participate, in open banking.

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Because it’s open banking that will enable apps, like these ones and many more, to help you manage your finances faster, more easily andsafely.

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How does open banking actually work?

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By opening up banks’ data, Open Banking makes it possible to pay directly from your bank account – which should be both faster and cheaper (than a credit card, who, as the middleman, charge a fee for facilitating that payment).

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When you set up your account you can opt to pay directly from your bank account. You might do this by using your banking credentials to log into your bank account, via their platform. This action creates a token. Generally a token is made from a series of random letters and numbers, so no-one knows that token relates to you. This token is encrypted and sent to your bank. This tells your bank that you want to make payments to this company directly from your bank account. Because you’ve used your banking credentials the bank sees this as a legitimate request and initiates payment of your purchases, when required.

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Lets take another example. Let’s say you see a news item from finappster's Facebook page and you want to check if it’s impacted the value of your investments. Rather than checking a myriad of apps, you only need to look at finappster. And from that you can make a fast and informed decision about what to do next. How’s that done?

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It’s exactly the same process. Like connecting your bank accounts (this time it might be your mortgage and your savings account), you'll also be able to connect your KiwiSaver account, share trading account,crypto trading account and / or managed funds account. Each action creates a token which is encrypted (so you’re completely anonymous) and sent to that specific provider telling them you want to connect that account to finappster. Your provider recognises this request and releases the data to finappster so you can see, in one place, what impact that news has had across all your investments.

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Now I’m sure you’re thinking – how safe is this? Actually, there’s a myriad of additional work that goes on in the background to keep your information secure. I’ve mentioned tokens, encryption and logging in as a form authenticating you. There’s also fire walls and as an extra security measure you can also opt to set up 2 factor authentication as part of your log in process. The key thing to remember, like how you create your passwords, and that you should never need to share your log in details with anyone.

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Where in the world is open banking?

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Open banking was kicked off by the UK and Europe, when on 13 January of this year, it became a legal requirement for banks to share their data with a third party who requested it. They wanted to allow for the development and adoption of innovative new fintech solutions and a more open ecosystem of providers. Stats from the Open Banking Implementation Authority (OBIE) show that there have been 1.2 million users of open banking APIs in June of this year. So it’s definitely becoming more popular.

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US regulators haven’t yet made open banking a requirement, but they have published standards similar to that of the UK and Europe and large US bank are already setting up data-sharing deals.

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That’s not to say activity hasn’t already started there. Mint.com is a personal financial management service in the US and Canada. Mint's primary service allows individuals to track bank, credit card, investment, and loan balances and transactions through a single user interface, as well as create budgets and set financial goals. Two years ago they were estimated to have over 20 million customers.

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Mexico have passed a fintech law which paves the way for an open banking regime. FinTech Mexico estimate open banking could generate up to $25m in interest from savings for families and companies. It’s anticipated the remaining Latin American countries will follow suit soon.

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As one of the most mobile-first continents, Africa’s open banking efforts have focused on providing alternative mobile solutions. They want to reach the wider population who have no existing banking relationship. Telecommunications companies are acting as the vehicle for this.

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Across Asia, API use actually started in South Korea in 2016 when they launched common data sharing requirements. WeChat and AliPay are already well-established in China and, with open banking, account for 93% of China’s mobile payment segment. Now Hong Kong and Singapore are also driving open banking. Japan and India have also taken steps in this direction, despite no regulatory authority driving the requirement.

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Closer to home, from July next year, it will be a legal requirement for Australian banks. It’s anticipated the four largest banks (holding 95% market share) will launch open some form of open banking this year. Rumour has it their initial focus is on payments.

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In New Zealand, according to law firm Bell Gully, implementation of open banking could go one of three ways.

Firstly, I mentioned it would be mandatory for the main Australian banks to share their data. Given they’re the parent banks of the main banks here, the banks here may voluntarily apply the same standards. This option is most likely to be the easiest.

Alternatively, the Reserve Bank have the power to set conditions of registration for registered banks. So they could make open banking a condition of registration for the four main banks. This could happen quite quickly.

Finally, the approach in most other markets has been to treat open banking as a competition law issue. In New Zealand, a legislative change would require a coalition Government, meaning it would be a very slow and uncertain process.

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Despite this, all the Kiwi-born apps mentioned above, and many more, reflect the support for open banking that will facilitate helping us to manage our finances faster, more easily and safely.

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It’s exciting that open banking is helping financial providers to become more customer-focused. Because it should be about us, the customer, seen from our perspective, our needs and wants, so that we have the option to make more informed choices about our money.

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